How to Structure an Employee Severance Package Regarding COBRA and the ACA

September 10, 2014 | By

Often, when parting ways with an employee, an employer may offer to pay for some months of COBRA continuation coverage so that the employee can remain covered without having to pay the substantial premiums associated with COBRA. Historically, this always seemed like a solid gesture from the employer and a “no-brainer” from the employee’s standpoint. However, with the implementation of the Affordable Care Act (“ACA”), employees who part ways from their jobs now have another option—purchasing insurance via the ACA “marketplace,” which may be less expensive. Because of the intertwining of potential timing issues between electing and obtaining COBRA continuation coverage and the opportunity to purchase insurance in the ACA “marketplace,” employers must give additional thought to the typical employee separation and offer of a severance package.

This article focuses on a limited issue:  the potential conflict that arises for the employee who accepts the employer’s wonderful gesture of paid COBRA premiums. Remember, generally, when an employee loses employment with a COBRA-covered employer, the employee is offered the opportunity to elect COBRA continuation coverage and avoid any gap in coverage that might otherwise occur by losing the job. Once an employee elects COBRA continuation coverage, he or she must pay the full premium cost on a monthly basis and can elect to retain coverage for up to 18 months (absent other circumstances that allow for an extended coverage period).

Given that the employee must pay the full COBRA premium for each month of continuation coverage (often 102% of the premium because of an added administrative fee), there is a significant possibility that comparable health insurance coverage could be purchased at a lower cost in the ACA marketplace. Here is where the potential “snag” may occur: the time frame when an individual can buy coverage in the ACA marketplace is generally limited—as relevant here, ACA coverage can be purchased:

  • in the first 60 days after losing coverage due to a loss of employment;
  • during any ACA annual open enrollment period (November 15th to February 15th each year); or
  • upon the loss of coverage due to using all 18 months of COBRA continuation coverage.

So, if I lose my job and my health coverage on January 31, but elect COBRA because my employer is paying for three months of continued COBRA coverage:

  • I will miss my 60-day window to buy coverage in the ACA marketplace (perhaps at a lower cost than the COBRA coverage); and
  • When the three months runs out on April 30, I will not be able to buy coverage in the ACA marketplace; instead, I will have to continue to pay the full COBRA premiums myself until November 15 (the beginning of the ACA annual open enrollment period) or until the end of the COBRA 18-month period, when I can buy the less expensive coverage in the ACA marketplace.

The consequences for the separated employee are potentially steep. Accepting the “generously” offered temporarily paid COBRA coverage can force the employee ultimately to pay more to continue the coverage beyond the employer-paid time period, while waiting to obtain less expensive marketplace coverage when the ACA annual open enrollment period rolls around. If the employee cannot afford to pay the remaining expensive monthly premiums after the employer-paid portion of COBRA ends, the employee could lose health care coverage completely for at least some period of time (and possibly even have to pay a penalty under the ACA for violating the individual mandate to have insurance, absent some exemption).

Seeking a practical solution or middle ground

Moving forward, employers who have traditionally offered temporarily paid COBRA benefits as part of a severance package should consider an alternative to reduce the risk of confusion and conflict due to the ACA and COBRA timing problems. One idea is for the employer to offer an after-tax cash “transition” payment that is equivalent to the amount of monthly COBRA premiums the employer would have paid for the employee’s benefit. Then, the employee can use the funds as he or she sees fit, for example, by:

  • electing COBRA coverage (from the date the employer-provided group coverage ends);
  • purchasing ACA marketplace plan coverage in the first 60 days after losing coverage due to loss of job;
  • electing some combination of COBRA coverage and an ACA plan by obtaining COBRA for a month as a stopgap while waiting for ACA marketplace coverage to take effect within 60 days after losing coverage due to loss of job;
  • using the funds to help offset the cost of being added to a spouse’s plan; or
  • seeking other healthcare plan options.

(Note:  Beyond the scope of this article, there are other potential hurdles/hazards that an employee can face as the “retroactive” application of COBRA is compared to the “prospective only” impact of purchasing insurance coverage in the ACA marketplace.)

For additional information regarding an employer’s notice requirements to COBRA qualified beneficiaries and to ensure that you are using the proper notice, please see the Model Election Notice found on the U.S. Department of Labor’s website at and click on “COBRA Model Election Notice.” 

Categorized In: Terminations, Workplace Policies